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Towson - Econ 201 - Class Notes - Week 5

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ECON 201 Microeconomics

Notes taken, interpreted, and formatted by: Jensine Bonner

Terms to Know:

^ (HH) - Household (BF) - Business Firm (G) - Government

^ (s) - services (g) – goods (l) - labor (S) - supply (P) - price

^ (QS) - Quantity Supply (QD) – Quantity Demand New (Es)- Elasticity Supply

^ (K) - Capital New (Ed)- Elasticity Demand New (PD)- Price Demanded New (TR)- Total Revenue

^ (MC) - Marginal Cost (MP) - Marginal Principle (MB) - Marginal Benefit Week 5 of Notes: Chapter 5- Elasticity

2/29/16

(P) Price of Elasticity of (D) Demand

The overall responsiveness of (QD) to the changes in (P)

Calculate -> Ed

(The Price elasticity of Demand)

% QD / % P

Top: New QD- Old QD/Old PD

Bottom: New P- Old P/ Old P

Based on the #’s-> they’ll determine if you are elastic or inelastic Elastic: Consumers are responsive

Ed > 1 (The Elasticity of Demand is Greater than 1)

% QD > % P

The P increases, and the QD decreases by a larger percentage

Ex. P increases by 8%, so QD will decrease by 16%

Inelastic: Consumers are not very responsive

Ed < 1 (The Elasticity of Demand is Less than 1)

% QD < % P

The P increases, and the QD decreases by a slightly larger amount Ex. P increases by 8% so the QD will decrease by less than 16% Unit Elastic: Consumers are proportionally responsiveIf you want to learn more check out Where was cuneiform discovered?

Ed = 1 (The Elasticity of Demand is equal to 1)

% QD = % D (Demand)

Ex. The P decreases by 8, so the QD increases by 8.

Ex. 2 Likewise, the P increases by 8, so the QD decreases by 8

3/2/16

Examples for calculating elasticity

Example 1

% QD = 10%

% P = 5%

---------------------------

Ed= 10%/5% = .2 This means that a 5% change in price = a 10% change in demand

Price Elasticity coefficient of Demand: Don't forget about the age old question of What are the stages of sensorimotor development?

% QD

12-2-/20 = l – 8/20l = 8/20= .4 -> 40%

When working with the price elasticity o’ demand (1) of the 2 #’s will be negative. This means that you cannot assume that a problem will be inelastic.

Must take the absolute value

Determinants of Elasticity

1) Substitutes

The items which we have more of are relatively elastic

When there are not a lot of substitutes, the product(s) are inelastic 2) Time

The longer the period of time, the more the substitute(s) will become available If you want to learn more check out What are substitutes and complements and give examples?

The longer/more = more elastic

Less time= less elastic

3) Size of Budget If you want to learn more check out What does it mean when a change in velocity is negative?

(2) ways to address how elasticity is determined by the size of one’s budget 1) Income groups

Poor, Middle (Class), Rich

If one is Rich then, everything is inelastic. Why? You don’t need a substitute because you can pay for it with ease- little financial strain.

(P) or (M)

Most products tend to be elastic (There will be more than one option)

2) How much of the budget the item consumes or will consume

Items that are lower priced will tend to be: inelastic

Prices that are higher priced: elastic

4) Luxury

Luxury items tend to be: elastic

Consumers will tend to find a more cost efficient substitute

5) Necessity

Despite the price, the consumer will buy it so, it is -> inelastic If you want to learn more check out What is the meaning of semi-rigid in packaging?

Most inelastic items: salt, & insulin

Elastic: cars, movies

Unit elastic: houses, fruit juice

3/4/16

Elastic: >1, % Q is larger than % P, decrease in total revenue when there is an increase in price, increase total revenue when there is a decrease in price

Inelastic: < 1, % P is larger than the % in Q, increase in total revenue when there is an increase in price, decrease in total revenue when there is a decrease in price

Unit Elastic: = 1, the % Q is = to the % P, there is no difference/change in total revenue when there is an increase or decrease in price

- When inelastic, there will be a push to increase the price which is ultimately pushing toward unit elasticity

- Unit elasticity = maximum revenue If you want to learn more check out What is the other term for arenes?

- Elasticity means that there will be a lower price, more & more customers, and then they will stop coming

Supply

Price elasticity of supply

Responsive of producers to changes in price

Es( Elasticity of Supply) = % QS/ % P

- Producers are very responsive to price changes

- With demand, be sure to take the absolute value, with supply, do not have to calculate it

- The slope and origin determine the price elasticity

- Inelastic take to the origin, origin- quantity

- Unit elastic= proportionate

End of Week 5 Notes. I hope that they were helpful to you. Notes will be uploaded weekly, so be sure to come back again!

Up Next: Week 6 Notes

- Jensine